U.S. Raises Stakes in WorldCom Case

A federal grand jury hands up indictments of ex-CFO Scott Sullivan and another former exec.

The government has raised the stakes in the fraud case revolving around WorldCom's ( WCOEQ) former top executives.

A federal grand jury indicted the failed telco's former chief financial officer and another finance officer Wednesday, effectively dangling the threat of jail time over the executives. The indictment puts additional pressure on ex-CFO Scott Sullivan to cooperate with prosecutors who likely have former CEO Bernie Ebbers in their sights, legal experts say.

Some observers were struck by the speed of the seven-count indictment, which came less than a month after Sullivan was arrested for his alleged role in WorldCom's $7 billion financial misstatement. Lawyers say it usually takes about a year between the launch of an investigation and indictments, and that clearly puts this case on the fast track.

"I'm not surprised by the indictment, but I continue to be concerned that the speed of the case may reflect a rush to judgment on what are very complex financial issues," says Seth Taube of McCarter & English, a Newark law firm. Taube is a former federal prosecutor.

The indictments come as the government seeks to restore confidence in the financial markets in the wake of a series of high-profile wipeouts. With the last year having seen the bankruptcies of Enron, Global Crossing, Adelphia and other former Wall Street favorites, prosecutors are eager to show the public that they are vigorously pursuing alleged wrongdoers. In the last two months, authorities have arrested top execs at WorldCom, Adelphia and ImClone Systems amid bookkeeping, financial and trading scandals.

Bernie Down the HouseWorldCom's rise and fall

By booking operating costs as capital investments, WorldCom was able to manufacture profitable results where losses should have been. The authorities will likely claim that by sustaining these false profits, WorldCom execs were able to gain from the strength of the company's stock price.

Though Ebbers founded and ran the company and personally hired Sullivan to handle its financials, connecting him in any direct way to the chicanery may not be easy. Ebbers makes an especially appealing target to prosecutors, because in addition to building the long-distance provider through acquisitions in the 1990s, Ebbers built up a massive debt to the company as its stock plunged. The lavish perks of CEOs have come under increasing scrutiny since the stock market began its long plunge more than two years ago.

The indictment means Sullivan faces a jail sentence if he's found guilty of securities fraud. It also means that even if Sullivan decides to cooperate with prosecutors and plead guilty, his sentence will likely be more severe than what would result from any pre-indictment agreement.

"My guess is he's facing between four and 10 years," says Taube. The lawyer adds that Sullivan could be facing decades behind bars, according to strict federal sentencing guidelines.

The indictment includes a new defendant, former WorldCom accounting executive Buford Yates Jr. News reports this week have speculated that prosecutors are pressuring lower-ranking WorldCom execs to testify against their superiors as the government builds a case in the accounting matter.

Prosecutors are said to be still working on a plea and cooperation agreement with former controller David Myers, according to published reports.

WorldCom filed for Chapter 11 bankruptcy protection last month after a late June disclosure that it had massively overstated profits by misbooking expenses. The company later added to the overstatement estimate, saying it would have to restate its financials to the tune of more than $7 billion. WorldCom shares, which reached $64 at their 1999 peak as the acquisitive company expanded its reach on the Internet, traded recently at 11 cents.